Buyers Meeting Point procurement by Kelly Barner

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"The Point" is written by BMP Editor Kelly Barner as well as a diverse group of guest contributors.

Should procurement be paid commission?

Should procurement be paid commission?

It is not uncommon for procurement to receive a bonus payment based on the savings the department has achieved. In this post we discuss if procurement would benefit more from being on a salary plus commission payment structure.

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The traditional approach for calculating pre-contract savings is to obtain a minimum of three supplier quotes, select the mean as the base point then count the additional savings achieved above the base point. The challenge for the CFO is because the savings are subjective, they are unable to truly identify tangible and quantifiable savings from procurement’s impact, therefore the level of bonus they might apportion directly to procurement is limited.


 

Assessing bid submissions based not just on initial costs but total forecasted end to end costs is becoming more prevalent as businesses take a wider view of the true cost of ownership. However, since the model for encouraging procurement to strive for savings remains focused on the bid submission, applying this approach to determine bonus compensation has a high likelihood of conflict. The bonus payment approach could arguably be stated as outdated, thereby creating an opportunity for procurement. An alternative approach might be to replace the bonus model with a commission structure, based on the end to end total contract savings.

 

Procurement benefits would include:

  • Ability to be recognised for the full business value a team/individual delivers.
  • Encourages and rewards end to end contract ownership and relationship management.
  • Encourages post-contract collaboration, ultimately leading to the possibility of generating post-contract savings within the same contract term.

 

The potential benefits for the business include:

  1. Maximises pre and post-contract savings.  Post-contract savings is an area currently underdeveloped as the main focus remains on pre-contract savings, which is understandable given it is the main area for bonus achievement.
  2. Creates a catalyst for procurement cultural change, focused on supplier collaboration and successful implementation. This unlocks the supply chain and drives innovation and collaboration across the business to increase bottom line profits.
  3. Ensures operational costs are kept to a minimum.
  4. Encourages and rewards end to end contract, maximising contract savings

 

There are many people within procurement who have “fallen” into the role rather than pro-actively sought to become procurement professionals. Even those who have deliberately sought after the role, few may still believe it was a good career choice. The change to commission based compensation has the potential to raise procurement salaries to new levels, provide a catalyst for change, and enable procurement to reflect their full business value, which could in turn could attract new talent and retain experience that is sorely needed.

Like all new ideas, there is an upside but also a downside. Moving onto a commission structure based on the overall savings from successfully managing the contract could quickly lead to some personnel being identified as under delivering. The key to gaining business support in this initiative is by demonstrating greater profitability for the CFO in undertaking this route. The central question is: does procurement want to undertake this direction?

 

 

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Would You Buy From You?

Would You Buy From You?

If you were to review your own procurement team’s achievements and capabilities from the perspective of a customer, would you buy from you?

The principle of using an internal business function which is currently a cost centre, and turning it into an revenue generating business proposition, is not new. Examples can be found in most areas ranging from IT through to Finance. The principle is based on creating such a leading business function others will pay to use.

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The Legacy Telecom Disadvantage

The Legacy Telecom Disadvantage

How often can you find 80% savings in your telecom bills? When it comes to legacy services, more often than you’d think!

In all industries there are mergers and acquisitions: Telecommunications and Technology being one where M&As occur more frequently than most. These changes can have significant impacts on the products and services customers are purchasing in terms of the actual technology being offered and the prices they are paying for it.

 

I recently completed an audit for a customer in the healthcare industry where I was asked to review their telecommunications invoices and look for more cost effective solutions than their current voice services. The first thing I noticed was how high their bills were for basic voice services - almost 480% higher than normal industry standards! The customer had not really looked at their bills for years and simply continued to pay the same monthly charges thinking all was right as rain. Understandably, patients are the priority for them - not the cost of their phone service. For this specific customer, the technology they had in place was a legacy service where the underlying carrier had recently been bought by a global industry leader, who had subsequently developed more cost effective products offering the same functionality at a much lower price. Unfortunately, carriers do not always offer up the insight into technology changes and lower cost options when it is in their best interest to keep the higher price bills in effect.

Presented below are some quick tips for reviewing your telecom bills to determine if a change in service is viable, beneficial, or more cost effective:   

  • Recurring Charges: How long have you been paying the same price? Pricing changes are common with technology-driven services. If you have had the same price for 3-5 years and under multiple contract terms, it is time to take a look at the market with fresh eyes. There are always compelling reasons or special circumstances for contracting a fixed price for longer terms such as newly implemented networks and systems; but for basic voice services…I don’t think so.
  • Time Passed Since Last Going-to-Market: As mentioned, most telecom companies are continuing to develop new innovative ideas and upgrades to their technology; most likely within 3 years of their current technology. If you have the same service in place for more than 5 years, it is probably time to take a look. I know “if it ain’t broke, don’t fix it”; but why not just get a feel for what is available and for a potentially lower cost? After all, it may be up to procurement to determine when something is ‘broke.’ 
  • Contract terms: When was the last time you looked at your contract? Do you (really) know what your current terms are? If you cannot answer these questions, chances are the answer is probably too long and you are month-to-month or under some ridiculous auto renewal clause. It is important to read the small print in your contract as you could be committing to an unrealistic term length with no out...unless of course you are planning to spend more money with the same supplier for an even longer term.

When we presented the opportunity assessment to our healthcare client, they were understandably shocked. We moved forward by leveraging the market-competitive offers to contract a new technology at almost one fifth of the current cost. The soft dollar costs of implementing the new service were eclipsed by the overall savings, making this a huge financial and technological success.

As I encourage you to review your bills more closely, let me add that the idea of tracking down wasted spend and going to market for legacy products and services is not limited to the telecom industry. It can be applied to any business commodity and begins with simply questioning the products and services you’re paying for. 

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Five Signs of a Logistics Leader

Five Signs of a Logistics Leader

Leadership is a rare and valuable attribute that will separate a good professional from a great one. A leader will possess a unique vision and the ability to transform this into a tangible reality. Most importantly, a leader should inspire others to do the same.

A united, forward-looking outlook is the best way to continue to propel the logistics industry forward. As a fast-growing sector affected by globalisation and advancements in technology, innovators must be a driving force. Having access to new ideas will play a fundamental role in building each leader’s influence and unique impact on the organization.

Check out these five key signs of a logistics leaders to enhance your own professional standing.

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Robots, Warehouses, and Fulfillment

Robots, Warehouses, and Fulfillment

According to TechInsider, there are warehouse robots currently in place that could potentially boost productivity up to 800%. Yes, you read that correctly: eight hundred percent. With huge boosts in productivity, it comes as no surprise that companies such as Amazon are taking automation to the next level, but what impact will it have on their employees? If the numbers stack up, the robot takeover could be imminent, but that does not necessarily mean human warehouse employees will become obsolete.

As with most technological advances, employees must adapt.  Remember when basic computers were introduced to the workplace? Let’s take a look at some of the robots being used today, how they’re being utilized, and most importantly, what it means already or is going to mean for their human ‘coworkers.’

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